Turkish stocks, currency rally on ruling party win

Results seen as a clear mandate to advance with pro-business reforms

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PolyaLesova

AudeLagorce

NEW YORK (MarketWatch) -- Turkey's currency and stocks rallied on Monday after the Islamist-rooted, pro-business ruling AK Party secured a decisive victory in parliamentary elections, ensuring some measure of political stability after months of turmoil.

In Istanbul, the benchmark IMKB-100 stock index advanced 5% to close at 55,625.44 points. The index has gained 42% this year, outperforming many other emerging-markets benchmarks, including those in Russia, India and Brazil.

The Turkish currency, the lira, gained 2.2% at 1.7191 against the euro. The lira rose 2.3% at 1.2440 against the dollar. See Currencies.

"Such a high support is rarely seen in Turkish democratic history," said Emre Tezmen, managing director at Tera Stock Brokers in Istanbul. "The outcome is a clear vote of confidence for the AKP government and a crushing defeat for the establishment and its political supporters."

"AKP would form the government and continue to follow reformist policies, which is very market friendly," Tezmen said in Monday research note.

With nearly all the votes counted, Prime Minister Recep Tayyip Erdogan's Justice and Development Party, often known by its Turkish initials AKP, looked set to win roughly 47% of the vote, topping the 34% it garnered in the last elections in 2002. According to preliminary results, Erdogan's party will have at least 340 seats in the 550-seat parliament.

The main opposition party, the Republican People's Party (CHP), received 21% of the vote compared with 19% in the last election. See emerging markets page.

The election results were largely in line with expectations from preliminary polls. Read more.

Turkey has been weathering several months of political turmoil triggered by a dispute over the parliament's election of a president. The focal point is the clash between secularists and the AK Party, which has Islamist roots and whose presidential candidate -- Foreign Minister Abdullah Gul -- was blocked by opposition parties. Read more.

"AKP's landslide victory is a huge setback for the main opposition Republican People's Party and the so-called secularist forces, including the military, whose unremitting rhetoric about "AKP's hidden agenda" failed to strike a chord with the vast majority of the population," said Wolfango Piccoli, analyst at the Eurasia Group.

"The Turks pragmatically voted for AKP due to the party's positive record in providing political stability, handling the economy and promoting Turkey's bid for membership in the European Union," Piccoli said in a research report.

UBS analysts told clients that the election gives AKP an opportunity to form another stable single-party government. "Markets will react positively to this outcome, given AKP's pro-reform track record in the past five years," the broker said.

A mandate to modernize

"Such a high support is rarely seen in Turkish democratic history."
Emre Tezmen, Tera Stock Brokers

Market observers said the results give Erdogan a clear mandate to continue the economic modernization of the country.

"On balance, the election outcome portends a renewed effort to modernize the Turkish economy," said Moody's analyst Kristin Lindow in a note published Monday.

"Although opposition parties now control more parliamentary seats than before, a more unified and progressive AK Party has a fresh mandate after having won nearly 50% of the popular vote, and thus could prove a more effective legislative force."

Standard & Poor's said Monday that AKP's reelection will have no immediate impact on Turkey's ratings. If the election of a new president is handled well and the AKP demonstrates continued commitment to prudence and reform, Turkey's ratings could improve, S&P said. S&P currently assigns Turkey a foreign currency rating of BB-/Stable/B.

The AKP victory fell short of the two-third majority needed to amend the constitution and allow the party to force through its own choice of president. See more global news.

The nomination of a new president was the trigger for Turkey's recent political crisis. When Erdogan in the spring tried to nominate his foreign minister Abdullah Gul to replace President Ahmet Necdet Sezer, due to step down on May 16, the army deemed the prospect a threat to the secular republic.

The military, which has deposed several elected governments in its history and was always suspicious of the AKP because of its Islamist roots, issued a sharp warning to Erdogan that his party was straying from secularism.

Erdogan eventually withdrew Gul's candidacy and called an early general election. It was unclear how the army would react to the results on Monday.

Among the president's considerable powers, he can appoint judges and university rectors and veto legislation deemed to violate the secular constitution.

"The most imminent challenge for AKP, and for that matter for the new parliament, is the election of Turkey's next president, which is likely to begin in mid-August soon after the election of the speaker of the parliament," said Piccoli of the Eurasia Group.

Upcoming presidential election a near-term risk

Although the AKP's broad victory confirms that many Turks trust Erdogan to run the country, several issues persist that could still destabilize the government and roil the country's financial markets.

Moody's analyst Lindow said two important near-term risks include the upcoming presidential election and the government's potential reaction to recent bomb attacks within Turkey attributed to the PKK terrorist group.

"A benign resolution in both matters would mean that Parliament could take up the pension reform that was put on hold following the constitutional court's negation of some its provisions," said Lindow.

UBS said the new government will have to reverse a pre-election fiscal slippage and reinvigorate the stalled process of social security reform and privatization, particularly in the energy sector.

Lindow notes that proceeding with economic reform could ultimately provide favorable ratings momentum should Turkey's debt and debt-service indicators, which are now worse than other countries rated at the same level, align more closely with its rating peers.

In foreign politics, progress in talks on E.U. membership will be key, according to several analysts, but the election in France of a new president opposed to Turkey's accession to the Europe club will complicate matters.

Turkey's High Election Board will announce the official results on July 29 and the composition of the new government should be announced within weeks.

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